A mortgage loan, colloquilly known as a mortgage, is the primary means by which an individual can borrow sufficient funds to enable them to purchase a property or real estate. Alternatively, it can be used by existing property owners to raise additional multi purpose funds by putting a lien on the property. A bank, building society, or financial institution lends money at interest in exchange for taking title of the debtor’s property. Upon the full payment of the debt, the conveyance of title becomes void and borrower becomes the rightful owner of the property. Mortgages often have a 25 or 30 year durations and the repayments are made monthly. Merger Arbitrage Limited has a handy FREE mortgage calculator to help you calculate the level of repayment for the size of your loan.
Mortgages are common in many jurisdictions and it is standard procedure for a home purchase to be funded by a mortgage loan. This is because few individuals have enough savings or access liquid funds to be a cash buyer This is where the individual is able to purchase the property outright. Naturally, countries with the highest demand for home ownership, have the most developed markets for mortgages as the two are inextricably linked.
Mortgages are generally funded through one of two ways depending on the jurisdiction. The banking sector provides funds through its short-term deposits. Whereas the capital markets supply capital through a process called “securitization”. This converts pools of mortgages into packages tradable bonds that can be sold to investors in smaller denominations.
The word mortgage is derived from a archaic French Law French term used in Britain in the Middle Ages. Its original meaning was “death pledge”. This refers to the pledge ending, or “dying”, when either the debt obligation has been repaid in full or the property is repossessed following a default on the loan.
Mortgage Background
The entity requiring a mortgage can be either individuals mortgaging their home or businesses mortgaging commercial property. This may include for example, primary business premises, residential properties to be let to tenants, or an investment portfolio. On the other side of the transaction is the lender who will supply the funds. This will usually be a financial institution, such as a bank, or depending on the jurisdiction a credit union in the United States or a building society in the United Kingdom. The loan arrangements can also be made either directly or indirectly through intermediaries.
Common features of a mortgage loan may include
- the size of the loan
- maturity of the loan (typically 25 or 30 years)
- interest rate
- method of paying off the loan
Other characteristics can vary considerably such as the imposition of Private Mortgage Insurance (PMI). This gives additional protection to the lender from a default on the loan. The loan is “secured” on the borrower’s property through a process known as mortgage origination. This is a legal mechanism which allows the lender to take possession and sell the secured property. This is also known as “foreclosure” or “repossession” where the lender can subsequently sell the property to pay off the loan in the event of a default.
